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None of the three different statistical measures of financial stress released this 
week suggest any conditions in the financial markets that would indicate that the U.S. economy is in a recession already, and none of them are exhibiting any upward trends that would point to a pending recession. In fact, all three stress measures have been trending downward through 2012, indicating that there is less financial stress now than at the beginning of the year. [Take a look at what each has to say and judge for yourself.] Words: 571
So says Mark J. Perry (www.aei-ideas.org) in edited excerpts from his original article* entitled Financial Stress In U.S. Financial Markets Remains Low By 3 Statistical Measures, And Has Been Trending Downward.
Perry goes on to say, in part:
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.
Here are descriptions and more details for each of the stress indices alluded to above:
1. The St. Louis Fed Financial Stress Index (STLFSI) is calculated using the principal components procedure based on 18 weekly data series that include seven interest rates, six yield spreads, and five other financial variables. For the last nine weeks, the STLFSI has been below zero (lower values indicate less stress, see blue line in top chart), and has generally been trending downward for the last year. The current measure of financial stress for the week ending last Friday at -.194 is below the historical average of zero.
(click to enlarge)
2. The Chicago Fed National Financial Conditions Index (NFCI) is based on 100 financial indicators consisting of 47 weekly, 29 monthly, and 24 quarterly variables, and has proven to be a highly predictive and robust indicator of financial stress at leading horizons of up to one year. Empirical analysis indicates that the NFCI is 95 percent accurate in identifying historical crises contemporaneously. Increasing risk, tighter credit conditions and declining leverage are consistent with tightening financial conditions are associated with positive values for the NFCI, while negative values indicate the opposite. The NFCI has been negative for the last three years, and has been trending downward for the last year (see red line in top chart). At -0.71 for the first week of November, the NFCI is well below its historic average of -0.40.
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3. The Kansas City Fed Financial Stress Index (KCFSI) is a monthly composite index of 11 financial variables (yield spreads and asset prices) and the KCFSI is calculated using the principal components analysis. According to Thursday’s press release, the Kansas City Financial Stress Index for the month of October continues to indicate that financial stress in the U.S. financial system remains low. The October KCFSI was -0.40 in October, a slight increase from September’s index, but below its long-run average of zero. For the last nine months starting in February, the KCFSI has been negative (lower values indicate less financial stress), and the general trend over the last year has been downward.
click to enlarge)
Bottom Line
Based on statistical measures of financial market stress from three district Federal Reserve banks, financial stress in the U.S. financial system remains low through the end of October (for the monthly KCFSI) and into the first week of November (for the weekly indexes).
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Past recessionary periods have been associated with rising index values for all three financial stress indicators, and we’re now seeing the opposite – all three indexes have been trending downward for the last year. Taken together, these three stress measures provide no evidence that the U.S. economy is in recession now, and no evidence that a recession is pending.
*http://www.aei-ideas.org/2012/11/financial-stress-in-us-financial-markets-remains-low-by-three-statistical-measures-and-has-been-trending-downward/
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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